Determinants of the profitability of Sheltered Workshops: efficiency and effects of the COVID-19 crisis

The socio-labor inclusion of people with disabilities represents a substantial social challenge in European countries, particularly in Spain. Sheltered Workshops (SWs), a type of Work Integration Social Enterprise, are companies specifically designed to provide employment opportunities for individuals with disabilities, offering ongoing support throughout the integration process. SWs need to be profitable to sustain their social contributions. This study investigates the determinants of profitability for SWs in Spain, analyzing a sample of 1133 entities from 2010 to 2020. Using a static panel data model (random effects) and a dynamic panel data model (Generalized Method of Moments, GMM system), we estimate, among other factors, the impact of efficiency on profitability, with efficiency scores calculated via data envelopment analysis (DEA). Our findings reveal that the positive effect of operational efficiency outweighs the negative effect of social efficiency, resulting in a net positive impact of overall efficiency on profitability. The SWs were able to operate effectively to meet the needs of people with disabilities while achieving financial viability by combining social and economic goals. The study shows no significant differences in these effects when considering the legal status of the SWs (for-profit vs. non-profit). Additional factors influencing SW performance include size, low risk, and leverage, which have a positive impact, while age, liquidity, and tangibility generally have a negative and significant effect. During both the financial and COVID-19 crises, SWs experienced lower profitability; however, a positive and significant relationship between efficiency and profitability was observed during the COVID-19 crisis. The robustness of our results was confirmed through alternative measures of efficiency and performance and by addressing potential endogeneity issues. Understanding how financial and social factors influence profitability helps policymakers develop growth and sustainability policies for SWs and enables practitioners to identify strengths and weaknesses, facilitating better decision-making.